Bankruptcy Preference Actions: Do You Have to Provide a Refund?

Western Massachusetts businesses may be surprised to learn what happens when a client, customer, or vendor files for bankruptcy.  When a person or business files for bankruptcy, the court appoints a trustee whose job it is to maximize the money available to repay all of the creditors.  The trustees will look at the debtor’s bank balances and other assets, but they may also look at payments that were made by the debtor in the months leading up to the bankruptcy.  If they determine that the payment violated certain guidelines, the trustee may seek to have the payment refunded.

If someone pays you an outstanding debt that they owe you right before filing for bankruptcy, the trustee may try to take that money back.  This is called a “preference action.”  The trustee will seek the refund to make sure that the debtor isn’t giving unfair preference to one creditor over another.  The debtor cannot avoid giving equal treatment to their creditors by paying a “preferred” creditors right before filing for bankruptcy.  Even if the payment is a legitimate payment for an outstanding debt, you may have to refund the money. 

If you are contacted by a debtor or bankruptcy trustee about a potential “preference payment,” there are some defenses that may help you keep the money you are owed.  You should consider hiring an experienced business litigation attorney to evaluate your defenses and determine whether you can keep the money. 

Author: Diana Day, Esq.